What is Venture Capital?
It is a private investment fund. Specifically, that invests money in ventures. In which the risk assessment is high, in anticipation of high returns in case of their success. Vc funds are an accepted and common way of raising capital. For instance, for the purpose of investing in start-up companies (“start-ups”) in the high-tech field.
Venture Capital Fund – Investment Strategy
It funds raise their capital from institutional investors (banks, pension funds and study funds) while private investors (angels) also contribute their share. When capital is raised, there is no entry for new investors and no exit for existing investors. Most funds invest relatively small amounts. However, they are scattered among a large number of companies. Most importantly, that is in one of the first three life cycles. For example, it can be the Seed stage, the Early Stage stage and the Growth Stage stage. The average investment period ranges from 7-10 years. During which the fund managers receive management fees worth 2.5% of the investors’ money. At the end of the investment period, between 15-25% of the profits of the company being sold are divided between them and the investors.
The oldest law in the game says – ‘Investing in a company that is in the early stages of its life will issue a more profitable stock in the future’. This is in fact the guiding principle of venture capital funds. They entered this game for the high return. If not for that, then it’s not worth the risk. And the risk is great. Funds operate under conditions of uncertainty. To illustrate, a statistic shows that out of 100 companies invested, less than 10 of them will be profitable enough for the funds. This is the same ‘risk’ that hides behind the threatening model name. As a result, behind it also hides the chance of a big profit, because one right investment, in the right company, is enough to force the rest.